If the Euro goes what happens to the Dollar?

Continuing the series on the economic woes in Europe there are reports from the Italian Prime Minister Mario Monti that serious decisions need to be taken over the next week in the run up to the European Summit on the 28^th and 29^th of June if there is to be any hope of saving the Euro. One of the biggest decisions will be over the power of the European Central Bank (ECB) to come to the aid of nations who are struggling financially. This would bring the ECB in line with the Federal Reserve in the US and the Bank of England in the UK in terms of what support the bank can offer. The push from Italy, Greece and Portugal is expected to be that the ECB will need to have the power to increase the supply of money into the economic system, essentially printing more oney to cover national debts. The problem with this is twofold at least. Firstly it potentially weakens an already struggling currency on the global markets at a time when for countries like Germany this could be disastrous, and secondly this would go against Germanys stance that countries in the Eurozone must use sound fiscal planning rather than quantitative easing to reduce their indebtedness, the austerity measures that are at the heart of the issues over successful negotiation of the delicate period.

It is being argued that Germany can only act in its own interests given the pressure that the whole economic area is under and there is a serious risk of a complete collapse of the Euro. The results of this for Europe are relatively well defined, and whilst dramatic, may not be the worst possible outcome, but what has yet to be addressed is the consequence globally. The biggest impact is likely to be on the US financial system. As was seen in 2008 when a largely American banking crisis had a profound global impact, the American currency and its banking systems are so inherently linked through operations and trade agreements with Europe and particularly with the Euro, that damage in Europe could easy shatter what little confidence there is in America, precipitating the global economic collapse that many are predicting. So, what can we expect if the Euro begins to fall? The only solution for America would be to allow European banks to fail in order to protect themselves, thus leaving the European Union to fall apart. This would almost certainly lead to widespread unrest across Europe on a scale significantly larger than that already seen in Greece and Ireland, and a likely move by the Arab nations to capitalise on the crisis and establish a stronger foothold in Southern Europe effectively recreating the Ottoman Empire.

With the current tension between Syria and Turkey, highlighted by the shooting down of a Turkish F4 fighter jet by the Syrian military, and Turkeys continued funding of the Free Syrian opposition movement this expansion from North Africa would seem highly likely. Any move in this direction would shift the balance of power globally away from Nato and towards a three power system of the US, China and expanded Arabia. The tension that this would create would put increased pressure on Israel whilst at the same time reducing American influence in the Middle East and pressurising them into withdrawal from Iraq and Afghanistan. Given the recent posturing by Putin this could be an opportunity for Russia to renew its antagonistic stance towards the US, almost certainly using existing links through Eastern Europe into Northern Turkey.

Things could get pretty heated pretty quickly unless something is done to hold Europe together in the face of increasing difficulty.